One Roof Community Housing was established by grassroots activists to provide affordable homeownership opportunities for residents of Duluth, Minnesota.
The social and economic benefits of stable homeownership, particularly the potential for wealth-building among low- and moderate-income families, are well documented.1 Homeownership continues to be out of reach for many of these households, however, particularly in the wake of the economic crisis. (See "Paths to Homeownership for Low-Income and Minority Households") Although home prices have fallen in many localities and interest rates are at record-low levels, stringent lending standards and significant drops in household incomes have prevented many interested low-income buyers from becoming homeowners. The Center for Housing Policy reports that from 2008 to 2010, renters earning no more than 120 percent of the area median income saw their household incomes decrease by 4 percent even as housing costs went up 4 percent. As a result, the number of severely cost-burdened renter households — those paying more than half of their income towards housing costs — rose by 2.8 percent during this period.2 Meanwhile, the foreclosure crisis has heightened awareness of the risks of homeownership for low-income and minority families and the need for solutions that help attain as well as sustain homeownership. Faced with these challenges, a growing number of communities are turning to shared equity homeownership.

An Alternative Homeownership Option

Shared equity homeownership offers an alternative option to renting and traditional homeownership. The term refers to an array of programs that create long-term, affordable homeownership opportunities by imposing restrictions on the resale of subsidized housing units. Typically, a nonprofit or government entity provides a subsidy to lower the purchase price of a housing unit, making it affordable to a low-income buyer. This subsidy can be explicit, in the form of direct financial assistance, or implicit, in the form of developer incentives for inclusionary housing. In return for the subsidy, the buyer agrees to share any home price appreciation at the time of resale with the entity providing the subsidy, which helps preserve affordability for subsequent homebuyers. Although several types of shared equity homeownership programs exist, Rick Jacobus, director of Cornerstone Partnership Initiative at NCB Capital Impact, and Jeffrey Lubell, executive director of the Center for Housing Policy, describe two basic approaches: shared appreciation loans and subsidy retention programs.3 Shared appreciation loans are second mortgages provided by a public or nonprofit agency that buyers repay in full at the time of resale along with a percentage of home value appreciation. These funds are then reinvested to make homeownership affordable to another low-income buyer.4 With the more common shared retention approach, resale price restrictions ensure that the subsidy remains with the home.5 The most widely implemented subsidy retention programs include community land trusts (CLTs), deed-restricted housing programs, and limited equity housing cooperatives.

CLTs increase affordability by removing
the cost of the land from the sale price
of a home — homebuyers purchase
the structure but lease the land from
the CLT, which retains ownership.
Resale price restrictions are built into
the ground lease to maintain affordability
for future income-eligible buyers.
Currently, more than 250 CLTs are
operating in 46 states and the District
of Columbia.6

In a deed-restricted housing program,
resale restrictions are recorded with the
property’s deed and generally remain
valid for more than 30 years. Estimates
place the number of deed-restricted
housing units at between 100,000 and
300,000 nationwide.7

Residents of limited equity housing
cooperatives are shareholders; instead
of a housing unit, buyers purchase a
share of stock in the cooperative,
which entitles them to occupy one
housing unit, at a much lower price.
Limits on the resale price of the cooperative shares ensure affordability. The National Association of Housing Cooperatives estimates the number of limited- or zero-equity cooperative units at 425,000.8

The maximum resale prices for shared equity homes in these models are established using formulas based on the appraised value of a home at the time of resale, changes to the consumer price index, or increases in the area median income.

Benefits of Shared Equity Housing

Although the different types of shared equity programs vary in structure, they are all distinguished by a common emphasis on owner occupancy, long-term or perpetual affordability, and equity sharing.9 These defining features enable shared equity models to facilitate broader access to affordable homeownership for low-income families. “Equally important,” notes John Emmeus Davis, one of the nation’s leading authorities on shared equity housing, these alternative models preserve “this opportunity for the same class of people over a very long period of time, while preventing the loss of the public (and private) subsidies that made this housing affordable in the first place.”10 In markets where home prices are rising faster than household incomes and in gentrifying neighborhoods, shared equity mechanisms generate workforce housing that remains affordable over the long term, giving workers more local housing options while allowing communities to retain essential employees. For local governments dealing with large volumes of vacant and abandoned housing as a result of the foreclosure crisis, shared equity homeownership offers an avenue to transform vacant properties into permanently affordable housing and retain any public subsidies invested in them.

Shared equity programs also help reduce some of the risks associated with homeownership for low-income and minority households. As Jeffrey Lubell observes, “There are two main ways in which shared equity homeownership reduces risks. First, by buying homes at below-market prices, shared equity homebuyers are insulated to a significant extent from falling home values. It’s still possible to lose money on a shared equity home purchase, but it’s much more difficult since prices need to fall considerably before shared equity owners are forced to sell at a loss. Second, the purchase of a less expensive shared equity home may free up funds in some buyers’ budgets to invest in other asset classes, such as retirement savings, education savings, etc., improving the diversification of assets.”11 At the same time, homeowners have the opportunity to build equity. An evaluation of seven shared equity homeownership programs conducted by the Urban Institute shows that, despite being subject to resale price restrictions, households in these programs earned significant returns on selling their homes. The study, which also analyzed outcomes related to affordability, security of tenure, and mobility for the programs, reveals lower delinquency and foreclosure rates among shared equity homeowners compared with owners of market-rate housing.12 A separate study commissioned by the National Community Land Trust Network (CLT Network) found that at the end of 2010, only 1.3 percent of CLT home loans were seriously delinquent compared with 8.6 percent of conventional market-rate home loans.13

Many of these benefits are illustrated in the following examples of two types of shared equity programs operating in localities with vastly different housing market conditions: a CLT serving northern Minnesota and a deed-restricted housing program that promotes affordable homeownership in San Francisco, California. The programs, both of which are included in the Urban Institute study, show that shared equity models can effectively promote long-term affordable homeownership opportunities in strong and weak housing markets.

One Roof Community Housing

One of 10 CLTs in the state of Minnesota, the Northern Communities Land Trust (NCLT) was established in 1990 by grassroots activists to provide affordable homeownership opportunities for low- and moderate-income families in the city of Duluth and surrounding areas. In January 2012, NCLT merged with Neighborhood Housing Services of Duluth, an organization with a similar mission, to form One Roof Community Housing. As with most of the community land trusts in the nation, One Roof Community Housing is structured as a tax-exempt nonprofit, governed by a board of directors that is elected annually by its more than 500 members.14 One of the distinguishing features of the CLT model is its tripartite governance structure, which balances the interests of multiple stakeholder groups. A typical CLT board includes equal representation from land trust leaseholders; community residents; and public officials, local leaders, or advocates who oversee the community’s interests.15 One Roof’s 16-member board follows this classic structure; one-third of the organization’s board is composed of representatives from low-income neighborhoods, including four CLT homeowners.

A Path to Affordable Homeownership

One Roof Community Housing’s operations are designed to meet the unique housing needs of the community it serves. At $41,092, Duluth’s median household income is nearly 30 percent lower than the state median. Over one-third of the residents pay more than 30 percent of their income towards mortgage expenses in the city, where the median home value of owner-occupied units is $151,300.16 “Duluth has really old housing stock and very low incomes, and while some would say there is plenty of affordable housing in town, it’s challenging for low-income families when they have to spend a lot of their time and income updating the homes,” notes Jeff Corey, One Roof’s executive director.17 To fill this need for quality affordable housing, the land trust builds and rehabilitates houses that it sells to families earning less than 80 percent of area median income (AMI) — the actual median household income of the land trust’s current homeowners is closer to 60 percent of AMI.

The Olson family owns a One Roof Community Land Trust home and leases the ground beneath for a small monthly fee.

The land trust currently rehabilitates vacant, blighted properties that it acquires from county foreclosure sales, the National First Look Program, and other bank programs.18 The rehabilitation work is done by One Roof’s own construction company, Common Ground. “We had to do things differently, compared to places with high property values like Boston or Austin,” says Corey. “We don’t have much housing being built to scale like in some communities — there are few developers of owner-occupied housing and no general contractors that specialize in building affordable housing. We weren’t able to get contractors to bid on our work, so we started building ourselves.”

The renovated homes, all of which incorporate green building features, are sold to income-eligible buyers at prices 20 to 25 percent lower than appraised value.19 As with most CLTs, One Roof creates this subsidy by retaining ownership of land beneath the homes. Buyers enter into a 99-year ground lease and pay a small lease fee to the land trust every month. To keep the homes, which must be owner-occupied at all times, affordable to subsequent low-income buyers, One Roof employs a resale formula that is appraisal-based; homeowners receive 25 percent of any appreciation in appraised value of the property and 100 percent of investment in eligible capital improvements made to the home.

Except for the resale and occupancy restrictions, One Roof’s homeowners enjoy many of the same rights and rewards as owners of market-rate homes, such as predictable mortgage payments, privacy, and an opportunity to accumulate wealth. Owners pay property taxes and are free to remodel or improve their CLT homes, which can eventually be passed on to heirs.20 When the homeowner wants to sell the land trust home, they have the option to choose One Roof as their real estate agent. The organization has its own realty company, a full brokerage through which it lists and sells land trust homes. Once again, a lower-priced housing market meant that One Roof needed to participate fully in the real estate industry. “Our price points aren’t so dramatically different from market rate that if we had sort of thumbed our nose at the realtor community, we could have put ads in the newspaper and had people come running. They are our colleagues and business partners, and working with them helps us meet our mission in the community,” notes Corey.

Pre- and Postpurchase Support

Homebuyer education is essential to helping buyers become informed, successful homeowners. One Roof offers free one-on-one homebuyer counseling sessions and requires buyers applying for land trust homes to complete an eight-hour, HUD-certified homebuyer education class and attend an orientation session about the community land trust program. Although it does not require applicants to get fixed-rate mortgages, the land trust does require mortgage preapproval from one of the four participating One Roof lenders and has the right to review and approve mortgages before purchase. Strict lending standards following the foreclosure crisis have left many land trust homebuyers unable to obtain a mortgage. A quarter of the CLTs that participated in a 2011 survey conducted in partnership with the CLT Network reported that buyers who qualified for their programs often were not able to purchase homes because they could not qualify for a mortgage. Nearly half of the respondents cited higher credit score and down payment requirements as the primary barriers to securing financing.21 Building and maintaining partnerships with lending institutions is one way to ensure that CLT homebuyers are able to overcome this hurdle to achieving homeownership.

One Roof Community Land Trust acquires and rehabilitates vacant, blighted properties and sells the renovated houses to Duluth area families earning no more than 80 percent of the area median income.

One Roof homebuyers are offered no-interest second mortgages to cover down payment and closing costs ranging from $2,000 to $6,000. An additional $2,000 in employer-assisted funding is also available to buyers who work for two of the area’s medical centers as long as they purchase homes close to their place of employment.22

To help owners keep their homes in good condition, One Roof disseminates newsletters, offers free home maintenance classes, and operates a tool lending library. Community residents can borrow tools free of charge from the library to complete necessary repairs and other home improvement projects. In addition, the organization assists CLT homeowners unable to make their mortgage payments due to temporary setbacks, such as a medical emergency, by providing small, no-interest loans paid directly to the lender. Homeowners in default due to long-term financial hardships are referred to Lutheran Social Services for foreclosure prevention counseling. This type of prepurchase support and ongoing stewardship “helps explain why owners of CLT homes rarely become delinquent,” says Emily Thaden, research and policy development manager for the CLT Network and author of the CLT foreclosure study. “Legal contracts for shared equity homeownership are not self-enforcing, and the challenges faced by lower income households do not entirely disappear just because their home is affordable. CLTs know this, which is why they steward both their homes and homeowners on an ongoing basis.”23

Such long-term guardianship is expensive, however, and CLTs require large amounts of capital investment to build a housing portfolio. Most of One Roof’s capital funding comes from HOME and Community Development Block Grant (CDBG) program funds awarded by local municipalities; other sources include the Minnesota State Housing Finance Agency and the Greater Minnesota Housing Fund. In addition, the organization generates substantial fee income, including lease fees, developer fees, and realty commissions, to finance its operations.

A Viable Model

The Urban Institute’s evaluation of One Roof (before the merger) found that the land trust has been successful at maintaining affordability and building wealth for its homeowners. Although the minimum income required to purchase a land trust home slightly increased, the homes remain affordable to most low-income households. One Roof’s homeowners, on average, realized a 38.7 percent annualized rate of return on resale, and 95 percent of homeowners who purchased 5 years prior to the study period had retained their homeownership status. Furthermore, only 1.1 percent of CLT homes — nearly all of which were financed with a 30-year, fixed-rate mortgage — were in the foreclosure process as of December 2009, compared with 4.4 percent of Duluth area homes.24 A separate study prepared for the Lincoln Institute of Land Policy, in which authors compared the One Roof land trust program with another low-income housing program in Duluth, found that the trust employed a more efficient use of subsidies and preserved affordability for multiple generations of low-income buyers.25 To date, One Roof has recycled more than $3.25 million in subsidies, overseen 67 resales, and helped 295 low-income families attain homeownership; one-third to half of these families are comprised of single mothers with dependent children.

One Roof Community Housing is unique in the scope of its services, which are structured to reflect market conditions and the community’s needs. “I think we are different in that very few land trusts do all of the things that we do. There are a couple of CLTs that have realtors on staff, quite a few act as developers, and there may be some that have their own construction company, but I don’t know any land trust that does all three,” observes Corey. He stresses that CLTs operating in low-priced housing markets have to have a viable business plan and differentiate their product from what’s on the market: “We have to be stronger than a typical nonprofit housing developer because we don’t go away after the homes are built. We have a responsibility to maintain strong organizational capacity to carry out the stewardship role for our homes and homeowners going forward.” With 228 units under its stewardship, the organization is presently working on expanding its geographic service area.26

San Francisco Below Market Rate Ownership Program

In sharp contrast to One Roof Community Housing, San Francisco’s Below Market Rate Ownership Program (Below Market program) assists households in one of the nation’s most expensive housing markets with a median home value of $785,191, more than four times the national median.27 According to a study prepared for the San Francisco Mayor’s Office of Housing (Housing Office), in 2011, only 7 percent of market-rate homes for sale in the city were affordable to households earning 80 percent of AMI.28 Not surprisingly, San Francisco’s homeownership rate of 37.5 percent is almost half the national homeownership rate.29 Since 1992, the city has been adding affordable units to its housing stock through the Residential Inclusionary Affordable Housing Program. The program, which has been amended multiple times over the years, currently requires 15 percent of housing units in all developments of 5 or more units to be set aside for low- and median-income families. The set-aside requirement increases to 20 percent if the units are provided offsite or if developers elect to pay fees in lieu of providing affordable units. Through the Below Market program, the city makes the inclusionary units in for-sale developments available at below-market, affordable rates to first-time homebuyers earning no more than 100 percent of AMI.

Sale prices for the two- to three-bedroom, below-market units in the Millwheel South development in San Francisco’s Dogpatch neighborhood range from about $280,000 to $350,000. Steph Dewey with Reflex Imaging

More than 850 Below Market program units — most of them condominiums — are in the city’s portfolio. These units are overseen by the Housing Office, which also administers the Residential Inclusionary Affordable Housing Program. The department posts information on below-market units available for purchase on its website and requires developers to advertise the units in at least five local newspapers that reach low- and moderate-income and minority households in the city.30 As with One Roof Community Housing, income-eligible buyers are required to participate in a first-time homebuyer workshop conducted by designated housing counseling agencies. These agencies receive CDBG funds from the city to promote homeownership counseling and build capacity in minority communities. Buyers must finance their purchase through 15- to 40-year fixed-rate mortgages from approved lenders. Housing Office staff members review the mortgages to make sure that buyers are not subjected to predatory lending practices. For both new and resale units, buyers are chosen by public lottery from a pool of qualified applicants. The Housing Office offers prospective homeowners assistance with down payment and closing costs ranging from $10,000 to $36,000.31 The funds are structured as shared appreciation loans to be repaid by the homeowner at the time of resale along with a certain percentage of the property’s price appreciation; the amount of home value appreciation to be shared with the city depends on the portion of the original purchase price covered by the loan.

Long-Term Affordability

To protect the long-term affordability of below-market units, resale restrictions are recorded with the property deed; purchasers sign a secondary deed of trust and related documents acknowledging the restrictions. Such restrictions or covenants are a widely used mechanism to preserve affordability. Hundreds of jurisdictions across the country employ deed restrictions to impose controls on affordable housing units produced through inclusionary zoning, and many CLTs use them in lieu of long-term ground leases, particularly for condominium developments. Unlike a CLT ground lease, however, the length of the affordability period in deed-restricted housing programs can vary depending on state statutes. Some states specify a limit to the affordability period, while very few explicitly define or authorize perpetual affordability restrictions.32 The restrictions placed on San Francisco’s below-market units are applicable for the life of the project and survive foreclosure; for units that were created before June 2007, the restrictions apply for 50 years but restart every time a unit is sold.33 The units, which must be owner-occupied at all times, can be passed to heirs only if the heirs meet all of the program qualifications (income-eligible, first-time homebuyer). The Housing Office monitors compliance by requiring below-market owners to submit an annual occupancy certification and report any changes in ownership status. The office also reserves the right of first refusal to purchase below-market units listed for resale.

A Balancing Act

In 2007, the city revised its homeownership program in response to changing market conditions. Previously, the resale price for below-market units was based on one of two formulas: changes to the consumer price index or a mortgage-based formula. The latter formula calculates the resale price by arriving at a mortgage payment that is affordable (defined as no more than 33 percent of gross income) to a household earning 100 percent of AMI. Along with a 10-percent down payment, the formula takes into account interest rates, taxes, homeowners association fees, and insurance costs at the time of resale. This formula “yielded perfect affordability,” notes Myrna Melgar, who oversaw the changes to the Below Market program as the Housing Office’s homeownership director during this time.34 As interest rates began to rise in 2006, however, homeowners who had purchased their deed-restricted units when the rates were low found themselves having to sell at a loss. The city responded by changing the resale formula. “We made the decision to sacrifice perfect affordability to ensure more predictability for individual homeowners,” explains Melgar. With the new formula, the resale price is calculated based on the changes to AMI, providing a more stable equity building opportunity for owners. Sellers receive the resale price excluding loans, closing costs, and any shared appreciation related to the city’s down payment assistance. Sellers also get reimbursed for capital improvements made to homes 10 years or older, although this amount is capped at 7 percent of home’s resale price.35

Melgar observes that the AMI formula may make below-market units more expensive over time, especially when interest rates are high. But given the city’s strong housing market, the program still meets a need for affordable housing for moderate-income families. “A number of homeowners were able to build a nest egg and move on to market-rate homeownership, which is the program’s goal,” Melgar notes. The Urban Institute’s evaluation of the Below Market program substantiates this conclusion based on an analysis of 771 sales and resales between 1999 and 2009. Study findings show that during this 10-year period, below-market units were purchased by first-time buyers with a median household income of about $60,000 at a median price of nearly half the units’ appraised value. Moreover, homeowners in the program were able to realize an annual rate of return of 11.3 percent on resale.36

San Francisco’s ownership program is not without challenges, however, and chief among them is limited access to credit for many income-qualified households. Few lenders are willing to provide first mortgages for the below-market units. Buyers at the lower end of the income scale who do manage to secure a mortgage often face high homeowners association fees in some neighborhoods, which significantly decrease affordability. Another challenge involves the substantial amount of resources needed to reach out to and serve the city’s high percentage of minority households. The Housing Office overcomes some of these problems by supporting a network of outside organizations. “The key is having good partners,” notes Melgar. “The city does a good job of training lenders and title companies, funding counseling agencies, and including stakeholders in any policy decisions. All of that is important to keep the program healthy and productive.”37

A Way Forward

Shared equity homeownership continues to gain popularity as a viable alternative to traditional homeownership. Shared equity programs have proven successful at providing stable, affordable homeownership opportunities to low-income families who would otherwise be priced out of the housing market. At the same time, these programs ensure that public resources invested in affordable housing are maximized. Homeowners realize many of the same benefits offered by traditional homeownership, only with much lower risk. Inherent safeguards — such as mandatory homebuyer education and fixed-rate mortgage requirements — continuous monitoring, and other stewardship activities that are a part of shared equity models support a sustainable homeownership experience. Just as important, the One Roof CLT in Duluth and the Below Market program in San Francisco show that, regardless of market conditions, shared equity models that balance preservation of affordability with wealth creation have the potential to help lower-income households build equity and move up the housing ladder.